EU Said to Seek Liquidity Exams in Bank Stress Tests

The European Commission is pushing to include tests on bank liquidity in next year’s round of European Union stress tests in the wake of Ireland’s financial turmoil, according to two people familiar with the discussions.

The possible changes follow concerns that the last tests, made public in July, didn’t show that banks could withstand funding crises, said the people, who declined to be identified because the talks are private.

This year’s Europe-wide stress tests focused on the levels of capital banks had to absorb losses and didn’t measure the risks posed by a lack of liquidity. Regulators will gather data for the tests at the start of next year, under the guidance of the European Banking Authority, the European Central Bank and the commission, the 27-nation EU’s executive arm.

“You need a clear view of what will be liquid and what won’t be and there are too many variables,” Simon Gleeson, a financial regulatory lawyer at Clifford Chance LLP, said in a telephone interview in London today. “That’s why it hasn’t been done yet -- it’s very easy to call for but very difficult to do in practice.”

During preparations for this year’s EU stress tests, some nations indicated that it would be difficult to compare banks’ liquidity, said one of the people familiar with the discussions.

Irish Bailout

Ireland is in talks with the European Union and the International Monetary Fund on an 85 billion-euro ($113.7 billion) aid package as the authorities seek to avoid the nation’s financial crisis spreading to Portugal and Spain. Ireland’s financial system imploded after banks racked up losses when a decade-long real-estate boom ended.

Allied Irish Banks Plc and Bank of Ireland Plc passed the European stress tests on their capital holdings. Anglo Irish Bank Corp. wasn’t tested. Germany’s Hypo Real Estate Holding AG, Agricultural Bank of Greece SA and five Spanish savings banks failed EU-wide stress tests on 91 banks in July.

Stress tests measure banks’ ability to withstand economic crises. The scenarios this year included securitized debt products being downgraded four levels by credit ratings companies, a 20 percent fall in the value of European equities in both 2010 and 2011, falls in real estate prices and tests in 50 other macroeconomic parameters.

The tests were criticized for not being stringent enough because European banks were shown by regulators to need only 3.5 billion euros of new capital, about a tenth of the lowest analyst estimate.

‘Demanding’

The next stress tests will be “demanding,” Jonathan Faull, director general of financial services at the commission, said at a conference hosted by the French markets regulator in Paris.

Regulators are “going to try and draw all the lessons from this year to try and improve” the stress-test methodology, Chantal Hughes, a commission spokeswoman, told reporters in Brussels. The European Banking Authority, or EBA, is scheduled to carry out the 2011 test “sometime towards the beginning of next year,” she said.

Within the past two weeks, Ireland’s three publicly quoted lenders reported an outflow of deposits since the end of June, amid concerns that bad-loan losses will exceed stress tests carried out by the country’s central bank. Irish lenders’ reliance on emergency European Central Bank liquidity rose a further 7.3 percent to 130 billion euros in October, Ireland’s central bank said on Nov. 1, as they were frozen out of wholesale markets.

Lost Deposits

Allied Irish, Bank of Ireland and Irish Life & Permanent Group Holdings Plc “lost 12 billion euros, 10 billion euros and 600 million euros of corporate deposits, respectively, since end-June,” said Emer Lang, an analyst with Dublin-based securities firm Davy, in a note to clients on Nov. 24.

“We fully cooperated” with the European “stress tests in the past and would continue to do so,” Ronan Sheridan, a spokesman for Allied Irish, said in a phone interview.

Anne Mathews, a spokeswoman for Bank of Ireland, declined to comment. Spokespeople for Anglo Irish declined to immediately comment. Ray Gordon, spokesman for Irish Life & Permanent, couldn’t be immediately reached for comment.

Heidi Ashley, spokeswoman at the U.K. Financial Services Authority, William Lelieveldt, a spokesman at the European Central Bank, and Franca Rosa Congiu, spokeswoman at the Committee of European Banking Supervisors declined to comment. The EBA will replace London-based CEBS in January.

Liquidity measures banks’ reserves of readily available assets and cash that can be used to pay off liabilities.

To contact the reporters on this story: Ben Moshinsky in Brussels at bmoshinsky@bloomberg.net; Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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